When planning out your retirement, you may find yourself very overwhelmed. So many people believe they know the common trends and pitfalls, but the truth is always the same. On top of that, there are many myths and misconceptions surrounding retirement – specifically spending habits. If you don’t know what is fact and what is fiction, you could find yourself in a sticky situation. To make sure this doesn’t happen, here are the top 10 myths when it comes to retirement spending.
You Will Spend Less in Retirement
When planning for retirement, many people believe that once they retire they will spend less money. In reality, there is a good chance that you end up spending a lot more than you initially saved up. According to the Employee Benefit Research Institute, research shows that close to half of all senior households, across all income levels, spend more during the first two years of retirement and one-third of households maintain a higher spending level six years after retiring. A habit like that can potentially lead to unexpected financial issues. To avoid this, you may want to make a list of your current spending habits and think about how you want to spend your money in the future.
Social Security Will Replace Your Paycheck
While Social Security does provide a post-career income, it will not replace your previous check. In most cases, Social Security substitutes about 40% of your pre-retirement income. To make sure you are financially secured throughout your retirement, you may need to find another source of income.
You Don’t Have to Pay Taxes
Another myth that retirees tend to believe is that you don’t have to pay taxes once you retire, which is false. Even though you may no longer be working, you will still have taxes to pay. The more common forms of taxing that seniors face comes from withdrawing money from Social Security and other assets. This also includes a traditional IRA.
Medicare Will Cover all Health Expenses
There is a common belief that Medicare will be able to cover any health expenses that you may face when you retire. While Medicare does guarantee you coverage, it provides less coverage than you may believe. Medicare only covers some services for free, so you need to be prepared for other expenses your insurance may not cover. According to an article published by The Motley Fool, long-term care costs, such as the cost of a nursing home, are not covered by Medicare. Your healthcare spending will more than likely increase as you get older, so it’s important you have an idea of where your health may be when the time comes to retire. Sometimes life just happens, so it’s also important you have an emergency fund.
If You Downsize, You Will Save Money
When some seniors retire, they make the decision to downsize their house. The reasons for this may vary, but some of the common ones include a desire for a more comfortable living space and/or a desire for a less expensive mortgage payment. If you are considering downsizing because of the latter choice, you need to know that you may not save money when you downsize. A reason for this is because many people forget to consider all the expenses that can go into downsizing. Some of these expenses can include property taxes, location costs, home maintenance costs, and HOA fees. These expenses can really add to the price of your home.
$1 Million is All You Need
When it comes to retirement, the standard amount needed to live comfortably has traditionally been $1 million. Up until recent times, it had been believed that this is all it takes to live out the rest of your retirement. Due to factors such as inflation, increases in the cost of living, and larger life expectancies, $1 million is no longer enough. If you try to go into your retirement with this amount of money, there is potential for you to burn through your finances before you’re expecting to.
You Will Save Money By “Aging in Place”
Another myth that retirees tend to believe is that they will save money by “aging in place”. What this means is that by settling into the home where you want to spend the rest of your retirement, you will avoid having to move to an assisted living center or nursing home, which in turn will save you any expenses that may come from going through such a process. The issue with this mindset is that there are plenty of other expenses you may have to face by choosing to stay in your home. There is a chance you may have to make modifications to your house to better help you live in it. Such modifications can include adding wheelchair ramps or building a bedroom on the first floor. If you are planning on saving money by “aging in place”, just remember you may face some hidden expenses.
The Four Percent Rule
The four percent rule is a concept that helps retirees determine how much money they can withdraw from their account each year. The rule of thumb is that by following this rule, you will be able to maintain a steady supply of income. While this may have worked in the past, increased life expectancy and other factors mean that following this strategy may leave you short of your financial goals.
Taking Social Security Benefits Earlier is Better
A lot of people believe that the best time to start collecting social security checks is right when you turn 62, but it might be better if you try to hold off until you turn 70. The reason behind this is because, according to the Social Security Administration, the full age of retirement is 66. What this means is that waiting will allow you to receive 100% of your social security benefits. So, by holding off on when you collect your checks, you can receive more money than if you start at 62.
Everyone Should Save the Same Amount
The final myth when it comes to retirement spending is that everyone should save the same percentage of their paychecks each month, regardless of income level, when planning for retirement. Since everyone has a different lifestyle, it’s important to gauge what your lifestyle is like now and how you want your retirement to be. Doing this may help you adjust your savings accordingly.
Now that you have a better idea of what facts are true and what are false, you may feel more comfortable and confident making the big decisions that come with planning out your retirement.